Chart of the week: This winning trade could deliver again

by John Burford from interactive investor |

This trade, highlighted here in January, made a 35% profit. Our chartist tells us how to play it next.

I went to bat for BAT – and hit a six!

In my Chart of the week column of January 28, I laid out my case that British American Tobacco (LSE:BATS) would start a large counter-trend rally phase off the horrendous bear trend that had been in force off the June 2017 high at £56.

In fact, I gave four solid technical reasons why the shares would likely reverse off the £23 low made on 28 January and set my first target at the closing of the previous gap around the £32 area.  That target was reached precisely on 20 March before peeling away.  Nice.

To recap: this was the daily chart I showed as of January 28 that held out that promise:

Source: interactive investor   Past performance is not a guide to future performance

In late January, we had a potentially complete five waves down (remember, the fifth wave is an ending wave) with the decline travelling in the channel between my tramlines. The killer feature was the huge momentum divergence at the low.  This is always a warning to expect a high-probability strong reversal.

And so it came to pass. Since then, we have seen a strong advance to the recent £32 high and here is the chart updated:

Source: interactive investor   Past performance is not a guide to future performance

The gap is now closed (gaps act as magnets) and the upper tramline resistance met. My first target hit.

As far as I know, there have been no major company developments that could 'explain' the reversal at the time it made the £23 low. Most 'conventional' analysts would have no explanation for this 'sudden' reversal other to say the shares were 'oversold' and due for a re-rating.

OK, so why did it occur when it did? Surely, the very same rationale could have been applied in August when the shares were trading much higher at £40 (oversold then), or in October when they were at £35 (also oversold then). They would have been way too early. No, that is post-event rationalisation and totally arbitrary.

The great benefit of using my Tramline Trading method is that it gives logical forecasts of likely events before they occur, not post-event rationalisations.

So, we have met a target – where to now? 

Having closed the gap and hit resistance, my most likely scenario is for a correction in wave 2 or B and then a fresh advance to break above the upper tramline. If that occurs, my next target, cited last time, would be £34 and then possibly £40-£42.

And because the momentum divergence at the January low was so large, odds favour further advances. But as a swing trader, I am taking some profits off the table here and looking to reinstate if and when we get a dip. But if the uptrend continues, I am happy to sit with my position – there is always a dip coming!

For more information about Tramline Traders, or to take a three-week free trial, go to  www.tramlinetraders.com

John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.

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